Rethinking Market Experiments in the Shadow of Recessions: The Good and the Sometimes Ugly; Propositions on Recessions

Vernon L. Smith (2014)

Rethinking Market Experiments in the Shadow of Recessions: The Good and the Sometimes Ugly; Propositions on Recessions

Abstract

In all economic recessions consumer non-durable expenditures are relatively stable, characteristics that have long applied to certain experimental markets. The supply and demand experiments of the 1960s and 1970s reliably and rapidly converged to the predicted equilibrium. These markets also were for non-durables: all sales were final; items could not be re-traded; subjects each knew their buyer (or seller) role in advance of entering the market. In eleven of the last fourteen U.S. Recessions, new housing expenditure was a leading indicator of decline. Moreover, economic recovery is always associated with housing. The experimental asset markets of the 1980s and 1990s likewise exhibited unexpected and unpredictable tendencies to bubble and crash. The larger the endowments of cash or the greater the inflow of cash, the bigger is the bubble; housing bubbles are also associated with the inflow of mortgage credit money.In the macroeconomic accounts, re-tradability, long durability, and credit inflow seem to be the key to instability.